Tuesday, September 25, 2012

A recent
report entitled "Public Sector Pensions: a Runaway Train?"
by the Canadian Federation of Independent Business (CFIB) examines the looming
disaster facing Canada's severely underfunded pension plans. These plans
are backed by Canadian taxpayers and will ultimately result in higher taxes.
On top of that, Canada's defined benefit public sector pension plans are
far ahead of their private sector counterparts, an issue that will create
resentment as the two issues combine.

Canada's
public sector is a rapidly growing entity. At the beginning of 2011,
there were 3.14 million non-retired members of public sector pension plans, an
increase of 26.6 percent over the decade as shown on this graph:

By way of
comparison, the growth rate of private sector employment was less than half the
rate of the public sector, reaching 12.8 percent over the same decade.

The graph
shows us that membership in municipal government pension plans grew at 39.9
percent, followed by 23.1 percent for provincial government pension plans and
"only" 21.6 percent for those enrolled in federal government pension
plans. The overwhelming majority of these future pensioners are enrolled
in defined benefit plans, the Cadillac of pensions, where pension income is
guaranteed. In sharp contrast, private sector pension plan enrolment
remained flat at 2.9 million members over the decade and again, in sharp
contrast, only half of those future pensioners are beneficiaries of defined
benefit plans.

Public
sector employees do contribute a portion of their earnings to cover their
future pensions, however, those contributions are only 41 percent of the total
set aside. In 2011, of the $31.3 billion set aside for public sector
pensions, employees contributed $12.8 billion (highlighted in light blue) and the unfettered generosity of
Canadian taxpayers set aside the remaining $18.6 billion (highlighted in dark blue). On top of that,
taxpayers funded liabilities averaging $1.3 billion per year (highlighted in black) over the past
decade as shown in this graph:

Way back in
2001, an average of $5,754 (in 2011 dollars) was being set aside for the
pension of an average public servant; by 2011, this had risen to $9,976
annually, a 73 percent increase.

Despite the
setting aside of all of this money, the fact that most public sector pension
plans are defined benefit plans means two things; first, taxpayers' liability
for funding shortfalls is unlimited and second, the ultimate cost of the
pensions is a complete unknown since pension entitlements are tied to salary
levels. Estimates by the CFIB suggest that public sector pension plans
have a total liability of about $1 trillion against assets of $673 billion,
leaving taxpayers holding the bag for more than $300 billion. To put this
number into perspective, this is over half of the current federal net debt.

How bad
could this get keeping in mind that all levels of government are suffering from
the same problem? Right now, the City of Montreal Pension Plan costs
account for 13 percent of its entire operating budget. Tiny Prince Edward
Island with its 140,000 residents finds its public sector pension plan
underfunded by a whopping $436 million or $3,114 for every man, woman and child
on the Island. This is roughly 22 percent of the entire provincial debt.
To meet a portion of this underfunding, the Provincial Treasurer is
setting aside an annual payment of $23.1 million over the next ten years to
address only 50 percent of the current shortfall.

Canadian
governments at all levels may well find themselves in the extremely unpalatable
situation of having to explain to voters why taxes must rise to meet pension
shortfalls at the same time as private sector employees find that the value of
their defined contribution pension plans are not sufficient to retire on
comfortably. With a huge number of baby boomer public servants looking
their pensions in the face over the next decade, governments need to make
changes to their pension plans now, including changes to defined contribution
plans for new employees and the use of "career earnings" rather than
"best five year" earnings before the pension train runs over them. Unfortunately, the pension train and the debt train are likely to arrive at the station at the same time!

OSA is the only pension low income earners get so he is taking on low income seniors. CPP if you worked worked all your life but never could pay the maximum you get less. I you become unable to work and take CPP early you also loss. So it's always the low income earners that suffer and there taxes are contributing to the public sector pensions too!

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.